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March 2009 Bulgaria with Its High Economic Dynamism and Financial Stability Is in a Good Position to Counter the Global Crisis

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March 2009 Bulgaria with Its High Economic Dynamism and Financial Stability Is in a Good Position to Counter the Global Crisis Bulgaria with its high economic dynamism and financial stability is in a good position to counter the global crisis. Over the past seven years it succeeded in registering high growth rates, in attracting foreign investors and capital and in bringing down unemployment. Thanks to a prudent fiscal policy, it managed to build solid reserves and even to generate budget surpluses in recent years. The Currency Board has been and will remain the guarantor of stability. In the last quarter of 2008, though, the repercussions of the global finan- cial and economic crisis could clearly be felt in Bulgaria too. It is to be expected that under its impact Bulgaria’s economic growth will slow down considerably. Bulgaria does not face the risk of a collapse in its banking sector and tremors in the national economy can be cushioned with additional economic programmes, while social disruptions can be minimized through adequate labour market policies. The crisis will lead to an overdue cleansing and market consolidation, especially in the real estate sector. The global crisis may lead to a new boom in Bulgaria’s “corruption econo- my”. With investments going down and the money flow from abroad deplet- ing, public expenditure and public tenders will grow as a counter-measure, thus increasing the “corruption pressure” in the institutions involved. The extent to which the global financial and economic crisis will impact in Bulgaria will also determine how substantially this might affect social and political parameters. March 2009 Bulgaria and the Global Crisis 1 CONTENTS 1. The Pre-Crisis Situation: Stable Macro-Economy and Dynamic Development..............................................2 2. No Crisis in the Financial Sector ................................................................................................................3 3. The Currency Board as a Factor of Stability ...............................................................................................4 4. A Weakening Real Economy ....................................................................................................................4 5. Slight Fluctuations on the Labour Market .................................................................................................5 6. Bulgaria in International Comparison .......................................................................................................6 7. The Economic Programme of Government ...............................................................................................7 8. The Neo-Liberal Mantra ...........................................................................................................................8 9. Crisis and Corruption: Mutually Amplifying Scourges ...............................................................................9 10. Crisis and Elections: Fertile Soil for Populists .........................................................................................10 11. The Optimistic Scenario: the Crisis as a Chance for Reform ..................................................................11 12. The Ugly Scenario: the Crisis as Regression into Morass ........................................................................11 2 Bulgaria and the Global Crisis 1. The Pre-Crisis Situation: Stable Macro- In the last quarter of 2008, though, the Economy and Dynamic Development effects of the global financial and econom- ic crisis could already be felt in Bulgaria as After the last economic crisis of 1996-97 well. Growth went down to 6.8% in the in Bulgaria when hyperinflation topped third quarter, only to drop sharply to a mod- 1000%, the successive Bulgarian govern- est 3.6% in the last quarter of the year. As ments managed to stabilize the macro- a result, the average annual growth did not economic framework. The Currency Board, exceed a mere 6%, staying below the of- which was introduced in 1997, pegged the ficially planned 6.4% (already downsized by New Bulgarian BGN (BGN) to the German the Government from previous 6.7%). More Mark (DM) in a 1:1 ratio and thus secured than half (55%) of the growth is generated the monetary stability of the country. The by three sectors – real estate, construction obligation to spend only what had been and financial services. generated before stimulated a prudent It is to be expected that Bulgaria’s eco- and restrictive fiscal policy which gradually nomic growth will slow down significantly managed to achieve a balanced budget, under the impact of the global financial to bring down external foreign debt, to and economic crisis. This is an imported build solid foreign-currency reserves and effect of the recession in Bulgaria’s major even accumulate budget surpluses in re- trade and investment partners. The initial cent years. The currency board still remains forecast of the Bulgarian National Bank of the guarantor of stability and the BGN is late 2008 was for 4.4% growth, the na- now pegged to the Euro, with 1 Euro at tional budget adopted in December 2008 1.95583 BGN. was based on 4.7%, while now the grim- Bulgaria with its high economic dyna- mest scenarios of the National Bank are mism and financial stability is in a good po- between 1.2% and 1.5%. The Finance sition to counter the global crisis. In Sep- Ministry’s forecast in December was 2.1%. tember 2008 the budget surplus amounted The latest IMF estimates for 2009 indicate to 5 billion BGN or 7.5% of estimated GDP. that growth will go down to 2% and infla- By the end of the year fiscal reserves were tion will be around 4.5%1. In late January, 13 billion BGN or 20% of GDP, domestic the European Bank for Reconstruction and currency reserves – almost 30 billion BGN Development (EBRD) lowered its estimates or 45% of estimated GDP, sovereign debt about growth in the Balkan countries. – 10, 5 billion BGN or 15% of GDP. In De- Southeast Europe is expected to grow at cember 2008 the foreign direct investments 1.9%, 1.5% less than predicted last No- (FDI) amounted to 3.7 billion Euro or 11% vember. The EBRD, likewise, estimates Bul- of GDP and were already less than the 4.7 garia’s growth at 2%. billion Euro (16.3%) of the preceding year. In December 2008 industrial output still There has been a positive development increased by 1.7% as compared to the pre- in the manufacturing industry where FDI vious month but it dropped significantly by marked a five-fold increase from 3.4% to 8.3% compared to the previous year, the 16.3% of the overall amount. average growth thus staying at 4% annu- Bulgaria consistently maintained high ally. The manufacturing industry shrunk by growth rates in the past seven years. In the first 10%, while mining was hit even worse with half of 2008 growth was still at 7.1%, stimulat- a 25% decrease and metal mining plung- ed among other factors by the 10% “flat” tax ing deeply by minus 65%. The present on corporate and personal incomes. The high growth of recent years was also due to the flex- ible, almost generous credit policy of the banks. 1 Ref. http://www.euromonitor.com/The_global_financial_cri- sis_Eastern_Europe_and_CIS_hit_hard Bulgaria and the Global Crisis 3 motor of growth is agriculture, with an in- Euro (Italy has 6.4 billion Euro through crease of 23% compared to 2007. UniCredit and Austria has 4.5 billion Euro The weak spot in Bulgaria’s economic in- through Raiffeisen). This amount, though, dices is definitely the current account deficit is a lot less than the 162 billion Euro in the which grew from 6.3 billion BGN in 2007 Czech Republic, the 121 billion Euro in Hun- up to 8.3 billion BGN in 2008, representing gary, the 227 billion Euro in Poland or even 24.3% of GDP. Until now, the deficit was the 98 billion Euro in Romania. Even in an financed by money transfers of Bulgarians “ugly risk scenario”, the banks do not ex- living abroad, FDI and credits. But the credit pect losses exceeding 20%. crisis will make its financing harder. In 2008 At the moment Bulgarians are not worried FDI dropped considerably and could cover about their money and there are no lines of only 68% of the current deficit (compared people in front of the banks. This may also be to as much as 129% back in 2007!). due to the fact that the government recently Exports, which were still booming in the raised the level of state guarantee on deposits first nine months of 2008, fell by 6.8% in from 40.000 to 100.000 BGN. the last quarter and marked an annual in- The obligatory minimum reserve of bank crease of only 2.8%, while imports went up deposits was reduced from 12% to 10%. by 4.8%. With 65% of Bulgaria’s exports At present the government is checking the destined for the EU, recession in European option of an inter-bank deposit guarantee countries like Germany is bound to pervade scheme which, if introduced, would give the Bulgaria as well. On the other hand, the fall- banks additional security. ing prices of oil and food products also ex- The Ministry of Finance will soon issue ert pressure on the economy. And if it were state obligations of 3, 5 and 10-years matu- not for the “grey” sector of the economy rity with a total nominal value of 750 BGN, which, according to experts, in good years plus short-term bonds for a total of 50 million added 2-3% on to the official growth rate, BGN. The goal is long-term stability of interest the economic collapse would have been rates which is one of the Maastricht criteria even more dramatic. for joining the Euro-zone. Experts sustain that industrial and com- 2. No Crisis in the Financial Sector mercial banking may be
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